Valuation
In this part of the book we will apply the methods shown in Part II to value both real and financial assets. While the fundamental value of any asset is the expected future cash flows discounted at its risk-adjusted cost of capital, the path to finding the cash flows and discount rates differs across asset classes. Stocks yield little or no cash flow, but can be very valuable. A bond that promises double-digit coupons can be worth very little. A property with low running yield can be worth more than a higher-yielding property. The aim of part III, then, is to show how you can make the proper analysis in this respect, with, of course, helpful Excel spreadsheets.
In chapter 9 we revert to capital budgeting as in chapter 7, but we introduce depreciation and its effects on taxes and cash flows. We also look deeper into how the discount rate is determined.
In chapter 10 we apply the lessons from chapter 9 for real estate investments. Debt, depreciation and taxes are important parameters in real estate investments.
In chapter 11 and chapter 12 we look at how financial assets such as bonds and stocks are valued. And finally, in chapter 13 we show different methods for valuing options.